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Inflation and Value redux: The events of 2022

Late in 2021 we published a Realinsights paper on the long term relationship between inflation and Value style investing. In that paper, we focused especially on whether the recent (and forecast) inflation spike we were seeing on the back of the COVID lockdown and stimulus packages would drive outperformance of Value in the near future.

A lot has happened since then.

Here we revisit some of our thoughts from that paper, and look at the more recent performance of Value in the face of (a) the Russia-Ukraine conflict, (b) high realised and anticipated inflation, and (c) the risk of a global recession.

Our main conclusions are:

  • Interest rates are likely to continue to rise, but they are probably ineffective against the supply side inflation pressures we are seeing at the moment
  • Inflation has increased due first to post-COVID stimulus, then due to the onset of the Russian-Ukraine conflict, and finally due to supply chain restrictions driven by the lock down of two of the world’s largest shipping ports (and China’s largest cities) in a bid to combat an outbreak of COVID.
  • Inflation commentary has moved from “transient” to “temporary” to “sticky” and is now approaching “entrenched” at a fast clip1.
  • Risk of a global recession has increased, but central banks are not uniform in this prediction. We are seeing many signs of slowing growth, while inflation is increasing. The risk of the dreaded “stagflation” is increasing (where prices rise but economic growth falters).
  • Value has performed very well during this period of uncertainty, which coincides with (but is not entirely driven by) higher inflation. Very expensive Growth stocks, hit both by slowing growth and by inability to source materials, have sold off significantly.
  • Value should continue to do well for some time (or Growth will do poorly), as the issues with supply of goods are unlikely to be resolved any time soon, and the knock-on impacts will take some time to filter through.

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This material has been prepared and issued by First Sentier Investors Realindex Pty Ltd (ABN 24 133 312 017, AFSL 335381) (Realindex), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group.

This material is directed at persons who are ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) (Corporations Act)) and has not been prepared for and is not intended for persons who are ‘retail clients’ (as defined under the Corporations Act). This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation.

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MUFG, Realindex, their respective affiliates and any service provider to the Fund do not guarantee the performance of the Fund or the repayment of capital by the Fund. Investments in the Fund are not deposits or other liabilities of MUFG, Realindex, their respective affiliates or any service providers to the Fund and investment-type products are subject to investment risk including loss of income and capital invested.

Any opinions expressed in this material are the opinions of the individual author at the time of publication only and are subject to change without notice. Such opinions: (i) are not a recommendation to hold, purchase or sell a particular financial product; (ii) may not include all of the information needed to make an investment decision in relation to such a financial product; and (iii) may substantially differ from other individual authors within First Sentier Investors.

To the extent permitted by law, no liability is accepted by MUFG, Realindex nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that Realindex believes to be accurate and reliable, however neither MUFG, Realindex nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of Realindex.

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